Share This:

We humans are really good at convincing ourselves of our “upper hand” — that we can see the “truth” when others cannot. We repeat stories of winning hands, the right stocks, and big paydays with our closest friends. Examples and supposed successes of prediction are trumpeted in our skewed media landscape, too.

For instance, CNBC and other financial news networks feature stock chartists who create lavish drawings of candlesticks, moving averages, and support levels. Lines are drawn and circles made on fancy touchscreens. When a stock fails to perform as predicted, it’s written off as a statistical anomaly. And nobody returns to the err. The reality is that any stock-picking strategy is fallible because the herd knows about it (or soon will). These technical mavens’ moves are already priced into stocks.

Scientists can also be poor predictors of future technology and advancement. As an astrophysicist, Neil deGrasse Tyson, explains, “…what happens is, if you try to go too far into the future, there is no way you are going to predict the cross-pollination of ideas and fields that produce things that are not extrapolations of anything going on at that time.” He exemplifies this technological development with the iPhone, as it wouldn’t have been created without GPS satellites, cell towers, and the commercialization of space. Variables needed to coalesce and come together to make the idea possible. Predicting each of these individual components is nearly impossible.

Variability shifts from 0 to ∞ across time. From short to long-term periods, our ability to predict what’ll happen next suffers. Also, what do you think of my chart-drawing skills? 😉

Psychologists are another fallible group that’s highlighted for near-telepathic powers. Popular culture seems to hold high esteem for their predictive abilities. They are depicted as readers and savants of the mind. Watch what you’re thinking, they might just read your body language, thoughts, and emotions! The reality is that psychologists aren’t fantastic at predicting behavior; slightly better than the lay public, but that’s not saying much. At their best, psychologists center on past behaviors as predictors of future behavior. Much like the stock chartist or scientist, psychological/behavioral prediction is sort of like analyzing an historical stock market chart and looking for patterns.

In failing to see our losses and failures of prediction, we risk creating confirmation biases. These psychological tricks of the mind make us think we are right — that our hypotheses have time and time again come true. We repress our failures in favor of successes, but in doing so, jeopardize our ability to accurately plan for the future. That’s when we stand to lose boatloads of money.

The fact is, we are fallible creatures. Seemingly, we are basically limited by the amount of knowledge available on the world. At a long enough timeline, nearly everyone fails.

By accounting for predictive limits, we can protect and preserve our wallets. Now, it’s all about what we do with this realization. These are five fast rules for managing your money without genius predictions:

1. Budget based on present day information

The present day includes your current income and expenditures. If you’re budgeting for a car, Christmas presents, or anything else, your budget should account for today’s income — not chances for the future. This will always keep you within limits. Unfortunately, many people use pay raises and predicted promotions to account for future purchases. This mentality can lead to excess debt and complicated repayment plans. Avoid the drama by budgeting based on today’s information — not what tomorrow might be like.

2. Be careful with retirement predictions

Companies like Betterment and Wealthfront have some sexy chartists! They beautifully illustrate the capability of compounding interest and continued investments in average performing stock markets. However, this tends to smooth over the swings of market swings and does not account for the unexpected. In fact, Betterment has a tool that attempts to predict with 50/50 accuracy how your money will perform over a set period, but it’s better to make consistent investments and look at the principal — not the predicted total.

3. Build up emergency funds

From a car accident to strange toenail fungus, you never know when you’ll need to pay for some extra costs. We cannot predict when an accident or the end of a job could occur. To account for our predictive inability, let’s build emergency funds. Most financial experts suggest people maintain about 3 months of solid income, which would cover expenses while you search for a new job or deal with an accident.

4. Avoid following interest rates

Tens of “online banks” are propping up with teaser interest rates. Instead of chasing the next biggest thing, stick with the consistent. For example, Ally Bank has earned my trust and respect after years of solid performance and service. This online bank doesn’t have wacky fees, gives me free checks, and pays a solid interest rate in both checking and savings. When you find a solid, long-term rate, stick with the bank. It pays to find a good company and then worry about making more income elsewhere — not following the next greatest interest rate.

5. Invest regularly – don’t chase bottoms

This tip comes from one of my hardest investing lessons. When it comes to putting money in the stock market, don’t call bottoms. Humans inability to predict is never worse than right here. If you think the market has crashed, you’ll likely be proven wrong. The stock market has tons of false bottoms and tops. Prediction isn’t generally your friend. Instead, I use average investment amounts and make regular investments. When the market suffers, I tend to invest more. But avoid the chase and focus on making consistent investments.

Share This:

Growing up in two market bubbles

I was 10 years old when the stock market entered an epic gurgle and burp. The technology bubble was well underway. As a child, I couldn’t help notice the daily papers’ coverage. Cisco, IBM, and Microsoft were going to stun the world, and a wealth of startups were making groundbreaking achievements through the Internet. Stores were moving online — people could buy stuff from their couches. And the market loved it.

Then it all came crashing down. Without profits and expected cash flow, companies petered out. They couldn’t sustain their losses, and the market was late to the realization. Nonetheless, as soon as people began selling the tech sector, stocks were doomed. The NASDAQ collapsed over a one-year period. While some had benefited from the meteoric rise, many failed. They chased moneyed dreams. The market had become a ponzi scheme of sorts, and the burst annihilated portfolios.

Average Joe’s and Jane’s across the world were affected. Money disappeared from pensions, IRAs, 401ks, and regular old investment accounts. Suddenly, people’s spending reduced — sour from massive losses and concerned about financial futures. People cut back because their ability to save and earn was jeopardized.

Putting the past behind us

Over time, these booms and busts are held in reverence. Ah, remember the market crash of 1999-2000? How about Black Monday? Oh, and how about the Great Recession of 2007 to 2009? Those were the days, right?

We try to put these events behind us and focus on the future. Some may say, “We’re long past those idiotic dreams and bubbles. We know better now.” We treat these as abnormalities — one-off events. The mavens repeat their mantras to calm the masses: “Timing is your friend. The market will recover.” But we never fix the underlying, systemic problems; thus, the cycle continues: boom and bust after boom and bust.

Wallets eventually open again. The economy eventually “bounces back.” In time, market optimism returns because consumer discretionary spending increases. Stocks get bid up again. And while we hope another bubble never returns and convince ourselves that a lesson was learned, something in us remains. We are still humans — the ones who caused the bubble in the first place.

That mentality to save every penny in crises fades like the hangover of a party best forgotten. We get excited again, and invest in financial instruments that some “guru” recommends that make little sense to us. We convince ourselves that we know better than to fall into some scam or trap. Eventually, the price of stocks becomes too expensive to sustain their momentum — for whatever the reason — and the roller coaster plummets.

Boom and bust cycles are everywhere

Even beyond the stock market, various points in history talk about cutting back and saving. For instance, the entire country rationed gasoline, coffee, and other necessities for those in combat during World War II. Our sacrifices would win the war. Our rationing would help others in need. And our country helped us collectively achieve this goal. These were frugal times. But after World War II ended, the country entered one of the largest economic growth spurts of all time. Production was enormous and the largest generation followed: the Baby Boomers.

More recently, an epic drought has swept over California. Crops are unable to grow and farmers are being asked to cut back on water usage. Without rain and irrigation, this might be one of the worst seasons for the West coast. Every time you look at the map of California it’s bright red for “exceptional drought.” There isn’t another level dryer, unless we’re forced to create it.

This exceptional drought has led to more brush and forest fires. People and their homes have been threatened. The state has fought bravely against these disasters, and many are pitching in to conserve and ration their precious water. Smartphone apps have been created to rat out neighbors who are using more than necessary. Residents are being asked to let their lawns brown. Certain crops and foods (i.e., almonds) are being targeted because of their excessive water needs.

The city of glitz and glamour, Los Angeles, has been a focal point for conservation. Rivers are non-existent and the heat bakes the surface. Many celebrities have extolled the value of cutting back, too. But everyone is wondering whether California will be able to weather this drought. What if the rains never return in full force? What if the land stays perpetually scorched? How long could this exceptional drought really last?

At many points in history we’ve done well rationing, scrimping and saving amidst tragedy. We come together and embrace each other as humans. We work together to move beyond struggle. And we ultimately have overcome every major concern we’ve ever faced. But over time, humanity has a painfully ironic inability to hold back and resist the urge to spend and splurge. We seem to perpetuate feast or famine — unable to live in moderation and within means. If history repeats itself (and it does), then we will likely see California boom again if the rains return. People will resume their previous water usage and restaurants will once again drop off full glasses of water without asking first.

Five ways to weather any storm

From the stock markets to droughts to wars, the booms and busts are everywhere. If we admit that we have a cyclical problem, the question becomes, What can we do about it? The following are five rules to follow a middle path in times of tragedy and prosperity:

1. Create a rationed budget

At the heart of saving more and spending less is a good budget, but what if you lopped off $100, $200, $300, or more each month? What if you pretended that the money was gone? In modelling the potential new budget during a tragedy or bust cycle, you can see the depths of your budget. If all else failed and suddenly made less each month, how would your spending change? How would your savings change? How would you cut back? The essential aspect to this thought experiment is actually going forth with it. Enact the rationed budget and see how low you could go. Pretend that the crisis is here, and save for better times. Then, if a problem occurs, you’ll follow a path of moderation.

2. Spending shouldn’t change based on market optimism

It’s easy to get swept away in the good times. People buy enormous houses, $1 million vehicles, and gigantic yachts when the market is doing well. Success looks like materials, so people buy in. To weather storms, spending cannot cave to market swings. Consistency is key. When others start buying wildly and race to the top, you should be thinking about where you’re spending too much.

3. Saving shouldn’t be limited to tough times

Saving money and concentrating on safe investments should always be a first priority. That priority shouldn’t waver or change amidst good times or bad. Tough times are the hardest time to save, actually. Think about it, if times are tough, you’re clearly strapped for cash. Save in the windfalls, booms, and busts. Again, to find the middle path amidst the excitement and tragedy, you need to calmly continue your savings.

4. Don’t trust market makers and commentators

Turn on CNBC and your brain will instantly accommodate talking heads’ suggestions. Their swanky ties, expensive suits, beautiful sets with technology galore, and impressive lifestyles can be captivating. I’ll be the first to admit that being able to eat at wonderful restaurants, travel the world in a jet, and drive a fast car sounds intriguing. But those market makers and commentators are selling a life that is temporary and not available to everyone. I will never own a jet or drive a Ferrari. Why would their advice and financial “expertise” help me? They live in a different category of human. Try to avoid their messages, as it can help you stay frugal.

5. Find a greater purpose/sacrifice to motivate modest lifestyles

Modest lifestyles can be challenging. It means eating out less, owning less, and looking for ways to invest and save every extra penny you have. But doing any of these things means bucking a system that encourages spending everywhere you go. Walk out the door and you’re bombarded by places to go, see, and spend. It’s easier to listen to these messages. To have a lasting, rationed budget or save more, you must find a higher purpose and reason to dig deep. Saying you get to live modestly through booms and busts isn’t enough. For me, I recognize that climate change is directly affected by my consumption behaviors. That changes my behavior. Additionally, I hold powerful regard for time to be peaceful, calm, and at rest. I value time over money.

We can leave the boom and bust cycle. We can protect ourselves and those around us, too. Create a rationed budget, and live it. Spend less than those around you. Save more than you thought you could. Don’t waiver as others panic or lavish themselves. Lastly, find a higher purpose that’ll motivate you when the going gets tough.

Share This:

If you regularly read Frugaling, you know I don’t shy away from the socio-political concerns that hamper people’s ability to save and earn. I’m a firm believer that in our very classist society, some are earning more than their fair share and paying less to the federal government than ever. This feudal system has tragic consequences for the working poor.

In the past, I took aim at the concept of “job creators.” This term has been manipulated and contorted into a Fox News slogan for reverse classism — pitying the 1 percent because they are somehow being threatened. Well finally, someone at CNBC — Jim Cramer, no less — is critiquing the great myth of the American job creator class. Go Jim!

Share This:

I’ve always looked to role models for inspiration, hope, and comfort. In high school, I watched CNBC anchors and admired people like Jim Cramer for their expansive knowledge of the markets. Dreams of Wall Street and financial gain motivated me to graduate high school; all while investing in stocks and different sectors between class periods. I loved having and making money.

When I entered college, I realized that money alone felt meaningless. I lost the drive to become an investment banker or financial analyst. Alone, I would continually feel like giving back – that I wasn’t doing enough. Shortly after entering school, I switched to psychology. There, I sought out motivated students and leading faculty in psychology. Meeting and working with these inspiring people led me to graduate school.

In the past, as you may notice, these role models were oriented towards my future career paths. Now, as I’m on a solid career path, I’m looking for new goals and people to provide support in this journey. Financial goals outweigh many others at this point: To pay off nearly $40,000 in debt (shared between student and car loans). The Catch-22 is that I’m in graduate school and still accruing debt. I’m experimenting with some odd-ball income sources to stem the tide, but the interest keeps gaining.

1. Leo Baubata, Zen Habits

Leo Babauta is the creator and writer of ZenHabits.net. The site grew to become a leader for buddhist thought, organization, getting things done, peaceful wisdom, and removing clutter from your life. I follow Leo on Twitter and subscribe to his RSS feed.

He calmly explains the delicate intricacies between inner peace and reducing the urge to buy. One of his most provocative new articles is about “A Year of Living Without.” In this article, he outlines a year of month-to-month challenges where he removes things he regularly uses (e.g., coffee, alcohol, Internet access, and cell phones).

Leo is a tremendous role model because of his own journey tackling debt and becoming a wealthy individual – spiritually and financially.

2. Joshua Fields Milburn and Ryan Nicodemus, The Minimalists

Joshua and Ryan are the founders of The Minimalists. Both left jobs and lifestyles that modeled the idea of success. They were climbing social ladders and fighting for the American dream. Their spending, like many, escalated with income. This lifestyle inflation led to a cycle of overspending and overworking – never getting enough.

As the two exited the traditional working world, they took to the ideas of minimalism and simplicity. Eventually, they founded their website and have been writing short stories ever since. For me, they are role models for both writing and minimalism. They model their stories (articles) after no expected length – some short and some long.

Joshua and Ryan are leaders in the simplicity movement, and their continued work inspires reductions in my own life.

3. Philip “PT” Taylor, PTMoney.com

Philip founded PTMoney.com in 2007. He’s the most financially experienced of my role models. As a Certified Financial Planner (CPA) and founder of FinCon (the financial bloggers conference), he embodies a spendthrift personality with an admirable entrepreneurial spirit.

His website is continually updated with new, strong content that actually helps people become financially savvy. From investing to saving more to earning what you deserve, PT and his fellow writers help people reach their financial goals.

Beyond this writing and business prowess, at a personal level, I’ve been shocked by PT’s kindness and willingness to help new bloggers like me. He’s already featured two of my articles on his site, too.

Who are your financial role models? Who and what inspires you to save and earn more?